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OPEC's War Against Shale Is Far From Over

Despite the recent market rally and current bullish streak in oil prices, the years-long competition for market share between OPEC and U.S. shale producers shows no sign of abating, and will likely continue for the next several years at least.

That was OPEC’s conclusion in the group’s World Oil Outlook released this week. OPEC believes U.S. shale production will grow faster than previously expected, reaching 7.5 million bpd by 2021, an increase of 56 percent from the group’s estimate last year.

According to OPEC calculations, current shale production in North America is approximately 5.1 million bpd—an increase of 25 percent from a year ago.

Despite low prices, shale has shown remarkable resilience and an ability to bounce back from downturns.

OPEC expects shale to finally taper off by 2025 and decline by 2030, by which point OPEC will have increased output by eight million bpd, from 33 million bpd to 41.4 million bpd.

By 2021, oil demand will increase by 2.3 million bpd, a fairly bullish projection. OPEC expects fierce competition with North American shale producers for market share, particularly when regulations on shipping fuel take effect in 2020, increasing refinery demand for fuels that shale producers will be well-positioned to provide. Related: The U.S. Export Boom Goes Beyond Crude

Total U.S. production will increase by 3.8 million bpd by 2022, chiefly on the back of increased shale output, equal to seventy-five percent of production growth outside the fourteen members of OPEC.

That growth will be front-loaded, says OPEC, as drillers seek out new fields and aggressively exploit current shale deposits. Yet OPEC admitted that shale will capture more market share in the short term, likely out-competing OPEC output. The group will probably commit to an extension of production cuts when it meets on November 30, and those cuts could extend to the end of 2018 and beyond, in order to raise prices.

But no one is tying the hands of shale producers, who are free to pump as much as they want. Higher prices are a powerful incentive for output to increase, with inventories rising unexpectedly this week by 2.1 million barrels after steady declines for the last two months. U.S. production, according to the EIA, rose by 67,000 bpd in the first week of November, rising to 9.62 million bpd.

Shale looked like it was slumping earlier this year. The rig count has steadily fallen since August, despite the increase in prices. Total production peaked in mid-2015 and then experienced a steady decline to August 2017.

A sudden increase could be possible if prices fix above $60, as many now predict, but it could take some time to translate into higher production.

OPEC is leaving the door open if it extends cuts—a tactical move that its leadership probably knows will cost it market share in the near term. Yet not everyone thinks the extension is a done deal. The head of Citigroup Inc. noted that hedge funds are banking on an extension before it becomes a reality. If tight market conditions emerge in 2018, Citigroup thinks U.S. shale will surge again, cutting back the balance put in place by the OPEC cuts. While the OPEC cuts are likely to be extended, Citigroup doesn’t see them lasting through to the end of 2018. Related: Venezuela Just 24 Hours Away From Formal Declaration Of Default

In advance of the OPEC meeting, expectations about a “fair” might have to change. A year ago, most OPEC producers would have been happy with $50, but now the expectation is that Brent will hit $70 by the end of the year. For OPEC states that have struggled for the last few years with budget deficits, the promise of higher prices is an immense temptation to cheat on their production quotas and break compliance with the cuts.

OPEC greed, increasing shale output and lower-than-expected growth could cause the price to fall again sooner rather than later. Then again, a sudden spike in geopolitical volatility in the Middle East or Venezuela could reduce output and tighten markets sooner than expected.

OPEC anticipates a fierce battle ahead with U.S. shale. Nevertheless, the group has much to be thankful for, as prices have recovered and markets appear to rebalance. Despite Citigroup’s skepticism, it’s likely OPEC leaders will soon agree on a further extension of cuts. While this could leave the door open to another surge in shale production, OPEC appears confident that, in time, the threat from shale will recede.

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Shale is free to produce their super light (basically condensate at this point) oil that no US refiners want. But, they are constrained now by their ability to export. If you listen to most calls now from big shale producers, their only option now for more production is to ship it off, there is no market for it at home.

Eulenspiegel on November 10 2017 said:

Until 2022, demand growth from India and China allone will exceed the projected 3.8 million barrels. We had more than 1 million growth every year now - and when Africa develops a bit, demand will grow here, too. Hey, even in the USA demand has risen this year.

What was killed in the price war was not shale, it was deep sea oil. Deep sea oil is in big trouble, and it is in whole more than shale oil. Ongoing projects will be finished, but there are few new projects, and drilling rigs are already scrapped, gone forever.

I don't think Opec can rise output that much in short time - otherwise they would have done it in the 100$ oil time. All their old battleships are in 50 years+ production on secondary or tertiary recovery, it's complicated enough to keep decline under control. All growth has to come from new fields, and not all countries have untapped giant fields. Additional, tapping new fields takes several years in preparation that has to start NOW when there has to be a big production growth in 2022.

So prepare for a bumpy ride - perhaps we need shale oil to prevent an oil price above 150$...

Citizen oil on November 10 2017 said:

What war ? Any war with shale will take everyone down. Not going to happen again. I'm amazed everyone is so concerned about the growth of 5% of supply. OPEC is greedy, make a little room for others.

Dan Stiles on November 16 2017 said:

What did the world expect from America, the country that created the oil industry from nothing? The oil industry in the Middle East and most of the world was primarily built by American engineers and companies. America was undisputed technology leaders as they built the industry up the world over even while production in the US lagged because they sought bigger returns on investment elsewhere. America is still the undisputed leaders in innovation and capability and the development of fracking technology was a natural result of that expertise and innovation. Without America the world would still be running on just coal and the Middle East would only be of interest to anthropologists.